QSBS After the One Big Beautiful Bill: The $15 Million Exclusion, Explained

Qualified small business stock (QSBS) under Section 1202 lets founders and early investors exclude large amounts of gain from federal tax when they sell C corporation stock. For stock acquired on or after July 4, 2025, the One Big Beautiful Bill Act raised the exclusion cap to the greater of $15 million or 10 times basis, raised the corporate gross-asset limit to $75 million, and replaced the five-year cliff with a tiered schedule: 50 percent exclusion after three years, 75 percent after four, and 100 percent after five. Stock acquired before July 4, 2025 keeps the old rules: a $10 million or 10-times-basis cap, a $50 million asset limit, and a five-year all-or-nothing holding period.

What is QSBS and why does it matter?

Section 1202 of the Internal Revenue Code allows a noncorporate taxpayer who sells qualified small business stock to exclude some or all of the gain from federal income tax, including, for fully excluded gain, the 3.8 percent net investment income tax. For a founder selling at a large gain, the difference between QSBS and ordinary capital gains treatment is often measured in millions of dollars.

The policy goal is to reward early, patient investment in small operating companies. The rules are therefore strict about what counts: the issuer must be a domestic C corporation, the stock must be acquired at original issuance (not bought from another shareholder), the company must pass an asset-size test at issuance, and at least 80 percent of its assets must be used in a qualified active trade or business. Service businesses such as law, health, consulting, financial services, and hospitality are generally excluded, as are banking, farming, and hotel businesses.

What did the One Big Beautiful Bill change?

The One Big Beautiful Bill Act, signed July 4, 2025, made three significant changes for stock issued on or after that date.

First, the per-issuer exclusion cap rose from the greater of $10 million or 10 times basis to the greater of $15 million or 10 times basis, with the $15 million figure indexed for inflation beginning in 2027.

Second, the corporate gross-asset ceiling rose from $50 million to $75 million, also indexed from 2027. A company now remains eligible to issue QSBS until its aggregate gross assets exceed $75 million, which extends the issuance window for later employees and investors in fast-growing companies.

Third, and most practically, the five-year cliff became a tiered schedule. Stock acquired on or after July 4, 2025 earns a 50 percent exclusion if sold after three years, 75 percent after four years, and 100 percent after five years. Under the old rules, selling at four years and eleven months meant no exclusion at all; under the new rules, early exits retain substantial benefits. Note that the taxable portion of gain on partially excluded QSBS is subject to a 28 percent rate under Section 1202 rather than the regular 20 percent capital gains rate, so the modeling is not as simple as applying the exclusion percentage to an ordinary tax bill.

Old stock versus new stock: which rules apply to you?

The acquisition date controls, permanently. Shares acquired before July 4, 2025 live under the old regime ($10 million or 10x basis, $50 million asset test, five-year cliff) no matter when they are sold. Shares acquired on or after July 4, 2025 get the new regime. Many founders now hold both vintages, and lot-level recordkeeping matters: which shares you sell, gift, or hold determines which caps and holding periods apply.

This split also affects option holders and convertible-note investors. QSBS holding generally begins when stock is acquired, not when an option or note is signed, so exercising options or converting notes after July 4, 2025 generally produces new-regime stock even if the instrument predates the law.

How does the 10x basis alternative work?

The cap is the greater of the dollar figure or 10 times your basis in the stock sold. For a founder with nominal basis, the dollar cap governs. For an investor who paid real money, the 10x branch can be far larger: a $5 million investment in qualifying stock can support up to $50 million of excluded gain. This is one reason later-stage investors who still qualify under the $75 million asset test care deeply about QSBS, and why contributing additional capital or property to a qualifying company is sometimes structured deliberately to build basis. The interaction of the two branches is computed per issuer and per taxpayer, with technical ordering rules across multiple sale years.

What are stacking and packing?

"Stacking" multiplies the per-taxpayer cap across family members and trusts. Because the exclusion cap applies per taxpayer per issuer, a founder who gives QSBS to properly structured non-grantor trusts for children, before a sale and as completed gifts, may enable each trust to claim its own exclusion up to the cap. Gifts of QSBS are a specifically permitted transfer: the recipient steps into the donor's holding period and QSBS status. Stacking must be done carefully; trusts that are not respected as separate taxpayers, or transfers too close to a sale, invite challenge, and the gifts consume gift/estate exemption ($15 million per person in 2026).

"Packing" raises basis to enlarge the 10x branch of the cap, for example by contributing cash or appreciated property to the corporation in exchange for additional stock while the company still passes the asset test. Packing is more technical and more aggressive than stacking, and the basis rules for contributed property contain traps; it requires experienced tax counsel.

A related tool is Section 1045, which allows a holder who sells QSBS held more than six months to roll proceeds into new QSBS within 60 days and defer the gain, useful when a sale arrives before the holding-period tiers are reached.

A hypothetical worked example

Consider a hypothetical founder who incorporates a Delaware C corporation in August 2025 with nominal basis, qualifying under the new rules. The company sells in September 2029, after four years and one month, and the founder's shares produce $24 million of gain.

Under the new tiered schedule, 75 percent of the gain within the cap is excluded. The founder's cap is the greater of $15 million (plus indexing) or 10 times nominal basis, so roughly $15 million governs. Of the $24 million gain, approximately $15 million is eligible: 75 percent of it, about $11.25 million, is excluded, and the remaining $3.75 million of the eligible layer is taxed at the 28 percent Section 1202 rate. The $9 million above the cap is taxed as ordinary long-term capital gain at 20 percent plus the 3.8 percent net investment income tax. Had the founder gifted shares to two non-grantor trusts for her children in 2026, each trust might have sheltered additional gain under its own cap. And had she waited until August 2030, the eligible layer would have been 100 percent excluded. The example is hypothetical and simplified; indexing, state taxes, and AMT interactions are ignored.

What are the common pitfalls?

QSBS claims fail for predictable reasons. The most common: the company was an LLC or S corporation when shares were issued (only C corporation stock at original issuance qualifies, though an LLC that converts to a C corporation can issue QSBS from conversion, with the asset test measured then). Redemptions are another trap: significant stock buybacks by the company within set windows around an issuance can disqualify the issuance entirely.

Other recurring problems include the company drifting out of the active-business requirement (for example, accumulating too much cash or investment assets), missing documentation of the gross-asset test at issuance, transfers to entities that break QSBS status (contributions to partnerships generally do; gifts and bequests do not), and state taxes: several states, including California, do not conform to Section 1202, so a federal exclusion may still leave a state bill. Finally, the exclusion percentages and 28 percent rate on non-excluded portions mean that pre-2010-style partial exclusions and the new 50 and 75 percent tiers require careful modeling rather than back-of-envelope math.

How do you document a QSBS claim?

QSBS is claimed on your tax return, but it is defended with records, and the burden of proof sits with the taxpayer. The core file should include the stock purchase or grant documents proving original issuance, a balance sheet or officer's certificate showing aggregate gross assets at and immediately after issuance, evidence of C corporation status on the issue date, and a record of any redemptions near the issuance window. For the active-business requirement, periodic confirmation that at least 80 percent of assets were used in a qualified trade or business protects against a later argument that the company drifted into disqualification.

Many growth companies now provide QSBS attestation letters to shareholders, and several diligence firms offer formal QSBS studies. For a holder expecting eight figures of exclusion, commissioning a study well before a sale is inexpensive insurance. Build the file when the facts are fresh; reconstructing a 2019 balance sheet during a 2029 audit is far harder.

When is QSBS not worth chasing?

QSBS should inform entity choice, not dictate it. A C corporation pays federal corporate tax of 21 percent on its earnings, while pass-through owners may deduct qualified business income and avoid a second layer of tax on distributions. For a profitable company that expects to distribute earnings for many years rather than sell, the annual cost of C corporation status can exceed the eventual Section 1202 benefit. The math tends to favor C corporation status for venture-style companies that reinvest earnings and aim for an exit, and to disfavor it for stable cash-distributing businesses.

Founders should also weigh execution risk honestly. The exclusion depends on tests measured years before any sale, and a single disqualifying event, such as a large redemption or an asset-test failure, can eliminate it. Treat QSBS as a valuable possibility to protect, not a certainty to spend.

Key numbers

Frequently asked questions

Does my older QSBS get the new $15 million cap?No. Stock acquired before July 4, 2025 keeps the $10 million or 10x basis cap and the five-year cliff, regardless of when it is sold.

Can LLC or S corporation owners get QSBS?Not on their existing interests. An LLC can convert to a C corporation and issue QSBS going forward, with the gross-asset test applied at conversion; built-in appreciation at conversion gets more limited benefit and the holding period starts at conversion.

Does gifting QSBS to my children's trusts really multiply the exclusion?It can. Gifts to properly structured non-grantor trusts carry QSBS status and holding period to the recipient, and each qualifying taxpayer has its own cap, but the structuring, timing, and gift tax consequences require experienced counsel.

What happens if I sell before the holding period is met?For new-regime stock, sales before three years get no exclusion. For any QSBS held more than six months, a Section 1045 rollover into replacement QSBS within 60 days can defer the gain.

Is QSBS gain exempt from state tax too?Not always. State conformity varies, and California is a prominent non-conforming state. Confirm your state's treatment before counting the benefit.

Does the net investment income tax apply to excluded QSBS gain?Gain that is excluded under Section 1202 is generally also excluded from the 3.8 percent net investment income tax. The taxable portion of partially excluded gain remains subject to it.